On July 10, 2013, the SEC adopted final amendments to Rule 506 of Regulation D under the Securities Act to disqualify issuers from relying on the Rule with respect to an offering if the issuer or certain other “covered persons” are subject to a “disqualifying event.”
The rule amendments apply to all “covered persons,” which include:
- the issuer and any predecessors and affiliated issuers;
- directors, executive officers, general partners or managing members of the issuer;
- officers of the issuer who are not executive officers but who are participating in the offering;
- beneficial owners of 20% or more of the issuer’s outstanding voting equity securities;
- promoters connected with the issuer in any capacity at the time of a sale in the offering;
- persons compensated for the solicitation of purchasers in connection with the sale of securities in the offering (or any general partner, managing member, director or executive officer of such solicitor); and
- any investment manager of an issuer that is a pooled investment fund (or any general partner, managing member, director or executive officer of such investment manager).
The rule amendments identify various “disqualifying events” and any timeframe applicable to such events. Disqualifying events generally include:
- criminal convictions, court injunctions and restraining orders in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries;
- final orders from the Commodity Futures Trading Commission, federal banking agencies and certain other federal and state financial regulatory entities, that bar the issuer from associating with a regulated entity, engaging in certain activities, or are based on fraudulent, manipulative, or deceptive conduct;
- certain SEC disciplinary orders relating to brokers, dealers, municipal securities dealers, investment companies, and investment advisers and their associated persons;
- SEC cease-and-desist orders related to violations of certain anti-fraud provisions and registration requirements of the federal securities laws;
- certain SEC stop orders and orders suspending the Regulation A exemption;
- suspension or expulsion from membership in a self-regulatory organization (SRO) or from association with an SRO member; and
- U.S. Postal Service false representation orders.
As adopted, disqualification applies only for disqualifying events that occur after the effective date of the rule amendments. However, matters that existed before the effective date that would otherwise be disqualifying must be disclosed in writing to investors a reasonable time prior to the sale. In addition, an issuer will not be disqualified from relying on Rule 506 when it can show it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering.
The rule amendments become effective on September 23, 2013.